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Biotech VCs Look For Ways to Make Deals Work in the Downturn

A new wave of pragmatism has settled over the biotech industry, judging from the comments yesterday by three San Diego-based venture capitalists. Venture capital firms that specialize in biomedical investments still expect to do deals despite the downturn this year, but they are adopting new strategies to minimize risks and maximize returns.It was a theme sounded repeatedly throughout a panel discussion held during a regular breakfast meeting organized by Biocom, the San Diego life sciences trade association. Yet each of the venture partners described differing strategies for coping with the downturn.

Jay Lichter of San Diego’s Avalon Ventures says his firm typically invests alone in very early stage drug development companies. “We’re willing to go deeper into the research, and happy to take the risk of being a sole investor,” he said. The reasons for Avalon’s investment strategy became clear later, when the panel agreed that the prospects for IPOs continue to look dismal. “I can’t think of a time when a venture group got a significant outcome from a company through an IPO,” Lichter said. “There really is only one exit and that is through a big pharmaceutical buyout.” So Avalon’s strategy is to make a small early investment, ideally no more than $3 million or $4 million, and make an early exit by brokering a sale to a pharmaceutical company for $20 million to $30 million. “When you see some VCs making significant investments of $60-$80-$100 million, it’s hard to see how they’re going to get their money out,” Lichter says.

David Kabakoff, an executive-in-residence in the San Diego office of Soffinova Ventures (and an Xconomist), had a completely different take: “We almost never invest alone and we almost always syndicate.” In today’s economic environment, Kabakoff says a broader syndication makes more sense, so that four or five firms will join to make a $20 million investment that three firms might have handled a few years ago. “So we’re very actively strategizing about how do you syndicate deals so the money lasts longer and goes further,” Kabakoff said.

Stan Fleming, a co-founder and managing member of San Diego’s Forward Ventures, says his firm also is looking at early stage deals, but they are focused on operating as efficiently as possible. “We are looking for virtual companies and a minimum burn rate, with a few high-level people to manage the subs,” Fleming says. As part of its lean and virtual model, Forward Ventures has been working closely with a major pharmaceutical to guide drug development. “Our ability to orient our programs and our companies to meet the needs of the pharmaceutical industry is absolutely critical to the survival of our industry,” Fleming said. As a result, he added, “All of us here are designing companies that minimize the amount of capital that you see in overhead and maximize the amount of money that goes into developing the product, and in a way that adds value to the product.”

Even though there is a tremendous shortage of innovation and new drug products among the big pharmaceutical companies, Fleming said, “We absolutely have to do what we do in a more efficient way. If we’re not good at that today, we will be good at it tomorrow—or we will not be here tomorrow.”